Rise In Insolvency Petitions In Hedge Fund Haven A Troubling Sign

Rise In Insolvency Petitions In Hedge Fund Haven A Troubling Sign

Insolvency petitions spiked more than 30% year over year in the Cayman Islands, as 2013 was a year when investors started to grow impatient with fund managers who domicile on the island. 

The increase reversed a downward trend in the number of insolvency petitions filed in 2011 and 2012 that had followed high numbers in 2009 and 2010 driven by the global financial crisis, according to Appleby Global, which provides hedge fund administration services and is headquartered on the Caribbean island known for its positive tax treatments and beautiful beaches.

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“The 2013 Cayman petition statistics suggest that investors are increasingly losing patience with investment managers’ efforts or promises of restructuring and other turnarounds,” Appleby’s Cayman-based litigation and insolvency Partner, Tony Heaver-Wren said in a statement. “Looking back to 2008, these numbers also offer insight into how the international investment market has reacted to the prevailing economic conditions, at least insofar as it is routed through the Cayman Islands.”

Insolvency petitions sign the global financial crisis of 2008 has not concluded

Appleby notes the rise in petition filings in Cayman in 2013 is a sign the global financial crisis of 2008 has not concluded.  And more ominous, the next wave of investor rejections of continued informal wind downs and other manager-led restructurings has begun, according to the report.

There was a 33% increase in insolvency petitions in 2013 fueled by a rise in both the number of winding up petitions and in the number of petitions to convert voluntary liquidations to insolvent liquidations, Appleby said in the report.  Winding up insolvency petition filings in 2013 were up 26% when compared to 2012 and up 81% compared to the 2011 filings. In 2013 petitions for conversion of voluntary liquidation to court supervised liquidation based on insolvency grounds increased by 50% compared to the same filings in the previous year. Meanwhile, schemes of arrangement picked up in 2013 as well, having reached their lowest point in the review period in 2012, and the number of share capital reduction petitions in 2013 was consistent with the annual number across the period.

“Life has never been harder for managers”

“If the markets become stronger, [there may not be] a huge increase in petitions—not because this analysis is wrong, but because that provides an alternative exit, it revives the hopes of an exit using a soft wind-down,” Heaver-Wren was quoted as saying in a report.  Managers have received considerable criticism, he said in the report, but many are continuing to work hard to return money to investors. “Life has never been harder for managers than in the last few years,” he said.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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